Government policy should be focussed on easing housing supply constraints in efforts to address housing affordability issues in New Zealand, the Reserve Bank says.
In a submission to the Productivity Commission's investigation into housing affordability, the RBNZ said a number of second-tier factors such as the tax mix, monetary policy, easier access to finance, and migration would all have had negative influences on affordability.
But it said the leading factor for house price rises would have been an undersupply in the New Zealand market, an issue the Commission needed to address in its investigation. See an overview of the Commission's investigation into housing affordability on our website here.
In its submission the RBNZ again noted in retrospect it may have been too slow to tighten monetary policy during the latest credit cycle during the previous decade. It reiterated calls that interest should be indexed for inflation (which the government is currently looking at), noting housing was a favoured investment from a tax treatment perspective - something which would influence demand for housing.
Financial liberalisation from the 1980s had made it easier for households to access finance, which, with housing supply slow to adjust to demand, would have fuelled increased in house prices, the RBNZ said. Large positive migration swings also increased demand for housing.
Ease urban limits?
The key supply-side factors appeared to be the availability and price of land for residential purposes and construction costs, the Reserve Bank says in its submission.
"The Resource Management Act, and the way it is applied by local councils, may be playing a role. One solution that is often advanced regarding land prices is for metropolitan planning agencies to ease their urban limits and, more generally, to ensure that residential zoning practices are more directly responsive to market price signals. This will help ensure that land is used for the most economically valuable purposes, as revealed by prices," it says in the submission.
The submission noted research by Motu economists Arthur Grimes and Yun Liang that argued house prices in Auckland had been driven up partly because of the city's metropolitan urban limits, which could be extended to both help economic development in the city and take pressure off house prices.
Environment Minister Nick Smith, who is the Mininster responsible for the government's policy to reform the Resource Management Act, released a paper in October last year which noted urban limits and their effects on section prices were being reviewed.
"Issues have also been raised around the most appropriate way for local council to cover the infrastructure costs around new housing, and whether the move to greater lump‐sum development levies may have played a role in inadvertently exaggerating house price fluctuations," it says in the Reserve Bank's submission.
Construction costs
Regarding construction costs, the Reserve Bank pointed to figures showing the CPI sub‐index for construction had risen by much more than the index for all consumer products, while the increase in hourly wages for construction workers since 2000 had been only slightly higher than for the full workforce.
"This is suggestive of low labour productivity growth in construction relative to the rest of the economy (and New Zealand’s labour productivity has not been high in the rest of the economy either). Over the very long‐term, and allowing for productivity growth, the prices of other inputs to housing construction like wood, steel and of course unit labour costs, should probably grow in line with the general level of prices in the economy," the Reserve Bank says in the submission.
"Some reasons for this productivity differential probably include the lack of scale in dwelling construction, with many dwellings being built as one‐offs, largely to individual specifications. A lack of innovation in construction methods may be another problem. While it is not clear to what extent the poor productivity performance of the construction sector reflects regulatory constraints, we nonetheless encourage the Commission to look carefully at this issue," it says.
More soon.
(Updates with supply comments)
27 Comments
What about the ridiculous amounts of credit that were pumped into the economy between 2000 and 2007? At the peak the credit supply was expanding by 17% per year (as were house prices!). If people couldn't get the loans or needed to save a decent deposit.. then house prices would be contained, simple as that.
What about the ridiculous prices buyers chose to pay? If people did their research and refused to be sucked into the inflated "market" prices then prices would also have been contained.
What level of our residential (and commercial for that matter) property are owned by non residents? If we didn't have to compete with foreign buyers what effect on the demand side over the past decade?
Interesting developments in the Australian property market.
http://www.macrobusiness.com.au/2011/08/housing-in-the-2000s/
http://www.macrobusiness.com.au/2011/08/the-foolproof-investment/
People would not be able to pay those prices without access to credit, at very low interest rates... which comes back to my original point, the government could impose a maximum LTV ratio on residential house purchases to stop the banks from giving away credit to Tom Dick and Harry for almost no deposit. Keep house prices in check and at the same time build the savings rate of the nation - kill two birds with one stone!
This chart says it all - look at the housing credit expansion in 2004 ..!!!!
No need to worry about housing affordability in New Zealand. Nick A and many others on interest.co.nz say house prices are going to collapse. Bernard's predicted ump'teen percent collapses as well.
Meanwhile...Infometrics have just reported rents in Auckland up over 5% in the June year. Mind you, that's well below my experience of 8.3% increases on the North Shore.
So while I stuff the extra money in my pockets I will continue to consider who's right and who's wrong.
My money is on my money.
And my money, Your Landlord, is on mine! As I stuff the extra $300 per week into the old bank account that is the difference, still - even at 5.5% mortgage interest rates - between owning my accommodation, or the price the landlord has it on the market for sale at. That's been a good near 4 years so far..and I'm estimating that not only will it continue, but that it's going to get far, far better. Unless, the old landlord 'gives in' and drops the price. Then all that will happen is that the sums come back into line...at fa, farr lower nominal property prices :)
It's incredible that the Govt is STILL talking about housing affordability...a huge waffle fest has been going on for the last four years....there was a Select Comittee on this in 2007, as per the links below:
http://www.parliament.nz/en-NZ/PB/SC/MakeSub/0/7/9/07969b3802794267b7bc7e256abe6037.htm
http://www.voxy.co.nz/politics/heatley-housing-affordability-sensible-solutions/5/2091
So when will there be some action??
The only observation from this is...National wants property values to flatline and wait for incomes to catch up...any other option would scare voters.
Interesting Graph. The RB is dead right. Will they be listened to? I doubt it, as there are too many crooks in public positions with interests in the property market, who will stop any such moves.
The divergence in the two cost indexes and wage curves represent either a drop in productivity and or more likely a rise in profit for one or two large and increasingly monopolistic building material supply companies. These will have significant influence on the same handful of crooked polititions who will be very aware of what side their bread is buttered.
Interesting thing that this all started with a Labour government and continued with National, so one is as bad as the other.
Old news.
Dese guys are only figgering out what some of us were pointing out years back.
Supply and demand, not that hard to comprehend...Gubmint regulation and the baleful effects of Town Planners, still zoning away when the RMA was meant to control stuff by reference to effects....
Sigh.
You said it, Waymad. You are one of the few bright guys in this country and on this forum. I have lost all my enthusiasm for participating either on this forum or in Submission Processes. Hugh Pavletich was quite justified in refusing to participate this time round.
I am finding other outlets for my efforts on this subject. Light is dawning on the fringes of the economics profession and academia worldwide. Eventually someone will win a Nobel Prize in Economics for sorting all this out theoretically (which is how the econ profession wants it done - they dislike the Hugh Pavletich empirical, real life approach).
This country can continue on down the tubes with all the other stupid ones. The future of western civ. currently hangs on Southern and heartland USA, with dozesn of cities with no urban growth boundaries, low regulation, low local taxes, and fair employment laws. I can't see anywhere else in the world today worth moving to, investing in, or starting a business in.
Recent rankings of economic prospects of US cities, from both William Fruth and Joel Kotkin acting separately to each other, show a pretty good correlation with these points I am making.
http://www.policom.com/metro.htm
http://www.newgeography.com/content/002322-the-next-future-boom-towns-i…
My God... It takes the RBNZ to raise this as a vital issue..!!!!
Where on earth are our "Super Councils"... other local bodies... The Govt...
These are institutions that are supposed to serve the people ... and provide leadership... If I could swear profanely, on this site, at these institutions ... I would..
ChCh is a wonderful opportuity to experiment with "affordable " housing ... It would be really interesting to see how that would impact on the vibrancy and economic growth of that City.
ahhhh.......
The other thing I would add... is that CPI construction costs ( nontradables ) are probably far more reflective of true inflation than are the total CPI figures.... That graph shows just how much wages are lagging.
U can see where the trends diverge back in about 2002.... That was a period of very high money supply growth... In 2002 we had $90 billion in M3... In 2008 it was $174 billion.
cheers Roelof
So there's a shortage of housing stock and the RBNZ comes up with the brilliant idea of building more houses. Wow! Seriously though, it's surely a no brainer to ease the supply restrictions that are hampering the market. I don't see how basing a society on artificially inflated house prices is good for anyone.
"In its submission the RBNZ again noted in retrospect it may have been too slow to tighten monetary policy"....as is the case right now.
This is a joke right?....the RBNZ played a leading role in the splurging madness...just as they are leading the near zirp crap now...just as they are steadfastly allowing the debasement of the currency....
What an utter farce....this is like having the jail inmates report on crime inside the jails.
Quick Alan...cut the ocr right now.... the banks are having trouble marketing their drug.
GOOD , Its about bloody time too . And good on you Alex for the artcle .
Now all we need is for City councils to stop gouging the process of land subdivision with ludicrous fees . and free up all those spaces within city limits for development .
The constrained land supply situation is holding New Zealand's development back .
And remember there is no land shortage in NZ , its the artificially constrained supply of land for development thats the probelm .
Thing is boatman...we are the suckers who believe the crap about being cantabs or jaffas and that plays into the council game. Exactly why there have to be regional councils astounds me...it's a gormless situation....Auckland has finally rid itself of the needless divisions..so why not elsewhere....WHY do we have a system that increases costs....it is bloody daft.
As for the RBNZ...give me a break...this is all about puffing ones feathers to remain in the govt eye...they don't give a rat's arse about peasant housing and never have. Yes Minister exposed the lot of them.!
Yes but actually there is no evidence of a shortage of housing stock, except in a very few areas of Auckland. ( And possibly in some Chch suburbs). Over-supply during the boom years went hand in hand with the price increases, and still leaves us with excess stock in many areas. For example, friends renting in Welly have found lots of choice and many landlords willing to negotiate rents. Rents and house prices are soft over most of the country.
We don't need an increase in OCR. There is a decreased demand for money right now- fewer people want to borrow your money, so supply and demand dictates that you will get less return for lending. If no-one wants your money why do you think you deserve a big return?
Darn right RBNZ.
Why is it in AUS, the cost of building a new house is approx $800-$900 per sq metre. Where as NZ, it's between $1300-$1500, plus labour cost in AUS is higher. I can only put it down to the extremely high compliance costs and local authorities fees.
Aussie building costs have always been lower.
When I was looking at building costs in Brisbane in 1989 prices were at least 40% less than ChCh at the time in dollar terms, which was about 20% less in actual terms.
Obviously they have had better economies of scale and more competition for some time.
these graphs are no big surprise. the wealthiest people I know are in construction, and they invariably pay bugger all tax. they also say they work bloody hard yet have more time off than anyone I know. reinforcing the productivity side of the CPI scale above. If the rbnz wanted to sort the rot out they would encourage builders to become a profession. sort out the cowboys and give the paying public some confidence to build, knowing full well they have some protection, and the backing of the State.
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